Credit Markets: Treasurys Move Up Amid Hint On Rates -- WSJ

1 Apr 2017 6:32 am

By Sam Goldfarb

U.S. government bond prices edged higher Friday as strong inflation data was outweighed by month-end demand and indications that the Federal Reserve will still take a cautious approach to raising interest rates.

The yield on the benchmark 10-year Treasury note settled at 2.396%, compared with 2.418% Thursday.

Yields, which fall when bond prices rise, initially ticked up in the morning after the Commerce Department said the personal-consumption expenditures price index rose 2.1% from a year earlier, marking the first time it has exceeded the Fed's 2% target in nearly five years.

Inflation chips away at the fixed returns of bonds and is the main threat to longer-term government debt. Sustained inflation above the Fed's 2% target can also hurt bond prices by causing the central bank to tighten monetary policy at a faster pace.

Shortly after the inflation data was released, however, yields dropped as Federal Reserve Bank of New York President William Dudley said in a television interview that two more rate increases this year "seems reasonable" based on current economic conditions.

That kept to the forecast of three rate-increases in 2017 that Fed officials have communicated since December and that, by now, has been largely priced into the bond market.

It was also consistent with what other Fed officials have said in recent weeks, which is "basically that we're looking for more rate increases, but we are absolutely in no rush to raise rates at a much faster pace" given continued weakness in parts of the economy, said Gennadiy Goldberg, U.S. rates strategist at TD Securities in New York.

Also bolstering the bid for bonds Friday was the typical demand that comes at the end of the month, analysts said. At this time in the calendar, newly minted bonds replace maturing debt in some benchmark bond indexes, and fund managers who track these indexes replicate the moves by buying Treasury debt.

The 10-year Treasury yield is headed for the first quarterly decline in three quarters, having ended 2016 at 2.446%

The yield rose by 0.841 percentage point between October and December, the largest quarterly gain since 1994, as investors placed broad bets on an improving global economy and the prospect of large fiscal stimulus from President Donald Trump.

Heading into the Fed's March policy meeting, the 10-year yield briefly topped 2.6% this month. But it dropped sharply after the meeting when Fed officials didn't change their economic and policy forecasts and took another turn lower after the failure of a health-care bill in Congress cast doubt on Mr. Trump's ability to push through his agenda.